New Zealand’s richest paying less tax is a good start – the road ahead is tough

If nothing else, a recently released Inland Revenue study looking at the tax rates paid by New Zealand’s wealthiest should debunk the notion that we have a progressive tax system. Actually it is not so. A progressive system is one where higher earners pay more as their income increases. The report, commissioned by Revenue Minister and Attorney-General David Parker, revealed that the country’s wealthiest are paying an average effective tax rate of 9.5 per cent (including GST).

This is less than half the 22 per cent tax rate paid by middle-income earners, or nearly 30 per cent if you include GST. But while many commentators have asked how such a low tax rate is possible, the real question should be what happens next? Will the government change the tax code to include a stronger capital gains tax? In a heated election year, is there much political will to target the main source of income of New Zealand’s richest people? Whatever the answer, we must first recognize how important this report is. The now defunct Tax Working Group, of which I was a member, was asked to carry out this study. It is heartening to see that the country now has better information on which to base its tax decisions.

One per cent of New Zealand’s Inland Revenue surveyed the incomes of 311 households from 2021 for its study. The average net worth of each household was NZ$276 million, and collectively the group had assets of approximately US$85 billion. Another way to describe it is that the richest one percent own about a quarter of the country’s financial wealth. According to the Inland Revenue, the people surveyed are meeting all their income tax obligations. There was no evidence of any wrongdoing. But only 7 percent of his total economic income is taxed in his personal name.

The other 93 percent comes from investment returns, most of which will not be taxed. These families also use institutions, trusts and companies, which are taxed at a lower rate than individuals. Based on the fact that 93 per cent of his wealth growth is from a non-taxable source, it is no wonder that he pays tax at such a low rate. In fact, it is surprising that they are paying as much tax as they are paying. Major changes unlikely Our unease over how we tax people (and whether the system is truly progressive) is more than just a sentiment, based on the insights contained in the Inland Revenue study. The report provides rigorous, factual information on the consequences of current tax policy.

Before the release of the report, however, Prime Minister Chris Hipkins declined to comment on Labor’s tax policy and whether there would be any changes. Revenue Minister Parker only hinted at possible changes. With the budget and election looming, it is unlikely that this government will make significant changes to the tax code. In the current political climate, it is very difficult to persuade the majority that new taxes are a good idea. But it is quite possible that there could be a tax reduction for low and middle income earners, with additional taxation on capital somehow. Who Pays the Bills?

While this is an obvious goal, we should not expect a robust capital gains tax. It was rejected by the previous Labor government and is unlikely to be accepted now. With the general election just six months away, there is no time to write and consider the requisite legislation. Most New Zealanders don’t really need to think about tax at all – more than half don’t even file a tax return. But this group should also benefit from being aware of the Inland Revenue findings and being better informed during subsequent debates on tax policy.

Because behind all these questions of who pays what tax rate, there are important considerations. New Zealand’s infrastructure spending is rising and more investment is needed in many social services. How we pay for it will determine whether we get ahead or fall behind. How much money the government makes from taxation, who pays and how much is paid is a political conversation that we cannot put off forever.

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